Recent Evidence Suggests Fast Fashion Industry’s Margin Improvement Efforts Falter as Boohoo Warns of Sales Decline
Today, Boohoo issued a warning indicating that its strategy to enhance profitability is having an adverse impact on sales, underscoring a broader struggle within the fast fashion sector.
Like many players in the fast-fashion industry, Boohoo has been striving to boost margins through measures such as raising prices, cost-cutting, and reducing returns, mirroring strategies adopted by competitors like ASOS, H&M, and Zara.
While Boohoo’s margins are expected to improve as a result of these measures, they’ve come at the cost of a more significant revenue drop than initially planned. Boohoo attributed this to “the continued targeting of more profitable sales,” projecting a sales decline of 12% to 17%.
Consequently, despite the potential for slightly improved margins, underlying profits are now anticipated to be lower than previously forecast, ranging from £58 million to £70 million.
Chris Beauchamp, Chief Market Analyst at IG Group, remarked, “Never was a company more appropriately named – the dire set of figures this morning are likely to offer little relief for embattled investors.”
Fast-fashion retailers have faced challenges this year, with weakened consumer sentiment and unpredictable weather conditions making it more difficult to sustain their high-volume business models.
ASOS recently cited wet summer weather and the effects of its pivot toward higher margins as its profits landed at the lower end of its guidance.
An untimely improvement in weather conditions further complicated matters for the fashion industry, with high temperatures in London during the sale of Autumn/Winter collections. H&M also reported a 10% drop in September sales due to a heatwave. Notably, Spanish giant Zara has been an exception to the fast-fashion downturn, reporting increased profits in the first half of the year.
Both Boohoo and ASOS have attempted to reassure investors that declining sales are part of their strategies as they transition away from the high-volume, low-margin model. ASOS named its strategy “Driving Change,” while Boohoo called its approach “Back to Growth.”
However, the market remains unconvinced. Boohoo shares fell by as much as 9.8% to 28.5p, their lowest since 2015, reducing the company’s value from its previous £5.2 billion to £364 million. ASOS also experienced a 4.2% drop and has declined 15% in the last month, falling 95% from its 2018 peak. ASOS is currently one of the most shorted shares in the City, closely followed by Boohoo. Mike Ashley’s Frasers Group remains one of the few investors betting on a recovery, repeatedly increasing its stake in both companies.
Josh Warner, Market Analyst at City Index, noted, “Investors may fear that the challenging economic outlook could pose additional challenges for both companies, particularly given signs of a pullback in consumer spending.”
Boohoo’s CEO, John Lyttle, emphasized, “Our confidence in the medium-term prospects for the group remains unchanged as we execute on our key priorities where we see a clear path to improved profitability.”
